The decision by Nevsky Capital, a London-based hedge fund, to close down shows
that the global economy is simply a mystery at the moment

Hedge funds close down all the time and the past couple of years have been particularly torrid for the alternative investment sector. So why did the winding up of Nevsky Capital, a London-based hedge fund that focuses on emerging markets, catch the eye?

For one thing hedge funds usually run up the white flag after they’ve lost pots of money. Not so Nevsky. The past two years haven’t been vintage – it lost 1.4pc in 2014 and eked out a 0.4pc profit last year – but it still outperformed most of its peers (which, according to the Absolute Return Composite Index, lost an estimated 0.09pc in 2015 on average).

And the longer-term track record of Nevsky Capital – jointly run by Martin Taylor, one of the Labour Party’s biggest financial backers, and Nick Barnes – is astonishing. On average the fund has made 18.4pc a year since 2000 – nearly 10 times more than returns generated by average peers as measured by the HFRX Index, according to Bloomberg. Over a 20-year investment career at Baring Asset Management, Thames River Capital and finally Nevsky, Taylor has made a cumulative return of 6,406pc.

So Nevsky knows its onions; the fact that it has decided to start selling its holdings and return money to investors has therefore sent shockwaves through the investment community.

In their letter to investors explaining the decision to shut up shop, Taylor and Barnes wrote that “certain features of the current market environment … are inconsistent with the achievement of our goal of producing satisfactory risk adjusted absolute returns”. Translation: it’s getting too hard out there for even the most talented investors to make money.

Why? The letter (which is worth reading in full) lays out the reasons. First up, Nevsky says it doesn’t know what is going on with the global economy. Or, more specifically, doesn’t know what is going on in China. And since what happens in China is increasingly influencing what is going on in the rest of the world, that’s a big problem.

It is also finding it increasingly hard to work out what nasties are being hidden by companies, which Nevsky claims have responded to greater scrutiny since the financial crisis by revealing less about themselves “on the basis that the less they reveal the less often they can be proved wrong by regulators, investors or law courts”.

Investors have resorted to 'Kremlinology' Photo: EPA/YURI KOCHETKOV

Nevsky adds that it doesn’t trust policymakers to act rationally. The rise of nationalism (“that peculiarly parochial yet multi-headed beast”) has resulted in investors resorting to Kremlinology (“truly the definition of banging your head against a proverbial brick wall”) to try to work out what is going on not just Russia but also China, India, Turkey, South Africa and Malaysia, among others.

Indeed, Nevsky is also worried that the emerging market bear market could spread to developed economies, with US equities “facing the growing risk that the Fed may have to rapidly tighten monetary policy, stretched corporate balance sheets and high valuations”.

Financial markets are, to all intents and purposes, broken

All this at a time when financial markets are, to all intents and purposes, broken. Nevsky has joined the chorus of financial participants who are warning that new regulations have drained liquidity out of the marketplace. They argue that this, coupled with the rise of “dumb” index funds and “black box” algorithmic funds, means that badly executed trades can quickly develop into illogical trends that can knock investors making decisions based on fundamentals for six.

Nevsky is confident that its investment approach – analysing economic data and company accounts to identify potential investments – will work again at some point, given that “the laws of economics will never be repealed”. But for now those laws are in abeyance, a situation that has been papered over by huge central bank intervention. With the Fed now starting to reverse direction, Nevsky’s managers know enough to know they don’t know how bad things might get or for how long.

Housing bet on the UK

Jefferies has put out a bullish note on UK housebuilders predicting that their shares will outperform the overall UK stock market in 2016. The arguments are well tested: there’s a shortage of supply and low interest rates are stoking demand. Meanwhile, a homeowner-friendly Government is helping things along with plans to build hundreds of thousands of new homes and a variety of help-to-buy schemes. Land prices are reasonable and, as long as labour costs can be managed, margins are looking good.

But there’s another reason for suspecting that UK housebuilders will outperform the rest of the market this year that Jefferies doesn’t mention. And that’s less to do with the sector fundamentals and more to do with the country in which those companies make their money.

Overweighting UK housebuilders compared with the overall market is, of course, a bet on the UK property market. But more broadly it is a bet on the UK economy. That’s not just in the sense that benign economic conditions lead to rising property prices but also that UK housebuilders make almost all their money in the UK.

MSCI, the index provider, has run the numbers and found that of the 104 constituents of its UK index, just 15 derive practically all their revenues from their home market. Seven – including Taylor Wimpey, Barratt Developments and Persimmon – are housebuilders and property companies.